SOCIETY OF ACTUARIES
EXAM FM
FINANCIAL MATHEMATICS
EXAM FM SAMPLE QUESTIONS
This set of sample questions includes those published on the interest theory topic for use with
previous versions of this examination. In addition, the following have been added to reflect the
revised syllabus beginning June 2017:
•
•
•
•
Questions 155-158 on interest rate swaps have been added. Questions 155-157 are from the
previous set of financial economics questions. Question 158 is new.
Questions 66, 178, 187-191 relate to the study note on approximating the effect of changes in
interest rates.
Questions 185-186 and 192-195 relate to the study note on determinants of interest rates.
Questions 196-202 on interest rate swaps were added.
March 2018 – Question 157 has been deleted.
April 2018 – Questions 4, 24, 80, 108, 161, and 162 were deleted. Effective October 2018 they
do not relate to the syllabus.
May 2019 – Questions 203-204 were added.
Some of the questions in this study note are taken from past SOA examinations.
These questions are representative of the types of questions that might be asked of candidates
sitting for the Financial Mathematics (FM) Exam. These questions are intended to represent the
depth of understanding required of candidates. The distribution of questions by topic is not
intended to represent the distribution of questions on future exams.
Copyright 2018 by the Society of Actuaries.
FM-09-17
1.
1
Bruce deposits 100 into a bank account. His account is credited interest at an annual nominal
rate of interest of 4% convertible semiannually.
At the same time, Peter deposits 100 into a separate account. Peter’s account is credited interest
at an annual force of interest of δ .
After 7.25 years, the value of each account is the same.
Calculate δ .
(A)
0.0388
(B)
0.0392
(C)
0.0396
(D)
0.0404
(E)
0.0414
2.
Kathryn deposits 100 into an account at the beginning of each 4-year period for 40 years. The
account credits interest at an annual effective interest rate of i.
The accumulated amount in the account at the end of 40 years is X, which is 5 times the
accumulated amount in the account at the end of 20 years.
Calculate X.
(A)
4695
(B)
5070
(C)
5445
(D)
5820
(E)
6195
2
3.
Eric deposits 100 into a savings account at time 0, which pays interest at an annual nominal rate
of i, compounded semiannually.
Mike deposits 200 into a different savings account at time 0, which pays simple interest at an
annual rate of i.
Eric and Mike earn the same amount of interest during the last 6 months of the 8th year.
Calculate i.
(A)
9.06%
(B)
9.26%
(C)
9.46%
(D)
9.66%
(E)
9.86%
4. Deleted
3
5.
An association had a fund balance of 75 on January 1 and 60 on December 31. At the end of
every month during the year, the association deposited 10 from membership fees. There were
withdrawals of 5 on February 28, 25 on June 30, 80 on October 15, and 35 on October 31.
Calculate the dollar-weighted (money-weighted) rate of return for the year.
(A)
9.0%
(B)
9.5%
(C)
10.0%
(D)
10.5%
(E)
11.0%
6.
A perpetuity costs 77.1 and makes end-of-year payments. The perpetuity pays 1 at the end of
year 2, 2 at the end of year 3, …., n at the end of year (n+1). After year (n+1), the payments
remain constant at n. The annual effective interest rate is 10.5%.
Calculate n.
(A)
17
(B)
18
(C)
19
(D)
20
(E)
21
4
7.
1000 is deposited into Fund X, which earns an annual effective rate of 6%. At the end of each
year, the interest earned plus an additional 100 is withdrawn from the fund. At the end of the
tenth year, the fund is depleted.
The annual withdrawals of interest and principal are deposited into Fund Y, which earns an
annual effective rate of 9%.
Calculate the accumulated value of Fund Y at the end of year 10.
8.
(A)
1519
(B)
1819
(C)
2085
(D)
2273
(E)
2431
Deleted
9.
A 20-year loan of 1000 is repaid with payments at the end of each year.
Each of the first ten payments equals 150% of the amount of interest due. Each of the last ten
payments is X.
The lender charges interest at an annual effective rate of 10%.
Calculate X.
(A)
32
(B)
57
(C)
70
(D)
97
(E)
117
5
10.
A 10,000 par value 10-year bond with 8% annual coupons is bought at a premium to yield an
annual effective rate of 6%.
Calculate the interest portion of the 7th coupon.
(A)
632
(B)
642
(C)
651
(D)
660
(E)
667
11.
A perpetuity-immediate pays 100 per year. Immediately after the fifth payment, the perpetuity is
exchanged for a 25-year annuity-immediate that will pay X at the end of the first year. Each
subsequent annual payment will be 8% greater than the preceding payment.
The annual effective rate of interest is 8%.
Calculate X.
(A)
54
(B)
64
(C)
74
(D)
84
(E)
94
6
12.
Jeff deposits 10 into a fund today and 20 fifteen years later. Interest for the first 10 years is
credited at a nominal discount rate of d compounded quarterly, and thereafter at a nominal
interest rate of 6% compounded semiannually. The accumulated balance in the fund at the end
of 30 years is 100.
Calculate d.
(A)
4.33%
(B)
4.43%
(C)
4.53%
(D)
4.63%
(E)
4.73%
13.
Ernie makes deposits of 100 at time 0, and X at time 3. The fund grows at a force of interest
t2
δt =
, t > 0.
100
The amount of interest earned from time 3 to time 6 is also X.
Calculate X.
(A)
385
(B)
485
(C)
585
(D)
685
(E)
785
7
14.
Mike buys a perpetuity-immediate with varying annual payments. During the first 5 years, the
payment is constant and equal to 10. Beginning in year 6, the payments start to increase. For
year 6 and all future years, the payment in that year is K% larger than the payment in the year
immediately preceding that year, where K < 9.2.
At an annual effective interest rate of 9.2%, the perpetuity has a present value of 167.50.
Calculate K.
(A)
4.0
(B)
4.2
(C)
4.4
(D)
4.6
(E)
4.8
15.
A 10-year loan of 2000 is to be repaid with payments at the end of each year. It can be repaid
under the following two options:
(i)
Equal annual payments at an annual effective interest rate of 8.07%.
(ii)
Installments of 200 each year plus interest on the unpaid balance at an annual
effective interest rate of i.
The sum of the payments under option (i) equals the sum of the payments under option (ii).
Calculate i.
(A)
8.75%
(B)
9.00%
(C)
9.25%
(D)
9.50%
(E)
9.75%
8
16.
A loan is amortized over five years with monthly payments at an annual nominal interest rate of
9% compounded monthly. The first payment is 1000 and is to be paid one month from the date
of the loan. Each succeeding monthly payment will be 2% lower than the prior payment.
Calculate the outstanding loan balance immediately after the 40th payment is made.
(A)
6750
(B)
6890
(C)
6940
(D)
7030
(E)
7340
17.
To accumulate 8000 at the end of 3n years, deposits of 98 are made at the end of each of the first
n years and 196 at the end of each of the next 2n years.
n
2.0 .
The annual effective rate of interest is i. You are given (1 + i ) =
Calculate i.
(A)
11.25%
(B)
11.75%
(C)
12.25%
(D)
12.75%
(E)
13.25%
9
18.
Olga buys a 5-year increasing annuity for X.
Olga will receive 2 at the end of the first month, 4 at the end of the second month, and for each
month thereafter the payment increases by 2.
The annual nominal interest rate is 9% convertible quarterly.
Calculate X.
(A)
2680
(B)
2730
(C)
2780
(D)
2830
(E)
2880
10
19.
You are given the following information about the activity in two different investment accounts:
Account K
Fund value
Date
before activity
January 1, 2014
100.0
July 1, 2014
125.0
October 1, 2014
110.0
December 31, 2014
125.0
Activity
Deposit
Withdrawal
X
2X
Account L
Fund value
Date
before activity
January 1, 2014
100.0
July 1, 2014
125.0
December 31, 2014
105.8
Activity
Deposit
Withdrawal
X
During 2014, the dollar-weighted (money-weighted) return for investment account K equals the
time-weighted return for investment account L, which equals i.
Calculate i.
(A)
10%
(B)
12%
(C)
15%
(D)
18%
(E)
20%
11
20.
David can receive one of the following two payment streams:
(i)
100 at time 0, 200 at time n years, and 300 at time 2n years
(ii)
600 at time 10 years
At an annual effective interest rate of i, the present values of the two streams are equal.
Given v n = 0.76 , calculate i.
(A)
3.5%
(B)
4.0%
(C)
4.5%
(D)
5.0%
(E)
5.5%
21.
Payments are made to an account at a continuous rate of (8k + tk), where 0 ≤ t ≤ 10 .
Interest is credited at a force of interest δ t =
1
.
8+t
After time 10, the account is worth 20,000.
Calculate k.
(A)
111
(B)
116
(C)
121
(D)
126
(E)
131
12
22.
You have decided to invest in Bond X, an n-year bond with semi-annual coupons and the
following characteristics:
(i)
Par value is 1000.
(ii)
The ratio of the semi-annual coupon rate, r, to the desired semi-annual yield rate, i, is
1.03125.
(iii)
The present value of the redemption value is 381.50.
−n
0.5889 , calculate the price of bond X.
Given (1 + i ) =
(A)
1019
(B)
1029
(C)
1050
(D)
1055
(E)
1072
23.
Project P requires an investment of 4000 today. The investment pays 2000 one year from today
and 4000 two years from today.
Project Q requires an investment of X two years from today. The investment pays 2000 today
and 4000 one year from today.
The net present values of the two projects are equal at an annual effective interest rate of 10%.
Calculate X.
(A)
5400
(B)
5420
(C)
5440
(D)
5460
(E)
5480
13
24. Deleted
25.
A perpetuity-immediate pays X per year. Brian receives the first n payments, Colleen receives
the next n payments, and a charity receives the remaining payments. Brian's share of the present
value of the original perpetuity is 40%, and the charity’s share is K.
Calculate K.
(A)
24%
(B)
28%
(C)
32%
(D)
36%
(E)
40%
14
26.
Seth, Janice, and Lori each borrow 5000 for five years at an annual nominal interest rate of 12%,
compounded semi-annually.
Seth has interest accumulated over the five years and pays all the interest and principal in a lump
sum at the end of five years.
Janice pays interest at the end of every six-month period as it accrues and the principal at the end
of five years.
Lori repays her loan with 10 level payments at the end of every six-month period.
Calculate the total amount of interest paid on all three loans.
(A)
8718
(B)
8728
(C)
8738
(D)
8748
(E)
8758
27.
Bruce and Robbie each open up new bank accounts at time 0. Bruce deposits 100 into his bank
account, and Robbie deposits 50 into his. Each account earns the same annual effective interest
rate.
The amount of interest earned in Bruce's account during the 11th year is equal to X. The amount
of interest earned in Robbie's account during the 17th year is also equal to X.
Calculate X.
(A)
28.00
(B)
31.30
(C)
34.60
(D)
36.70
(E)
38.90
15
28.
Ron is repaying a loan with payments of 1 at the end of each year for n years. The annual
effective interest rate on the loan is i. The amount of interest paid in year t plus the amount of
principal repaid in year t + 1 equals X.
Determine which of the following is equal to X.
(A)
v n −t
1+
i
(B)
v n −t
1+
d
(C)
1 + v n −t i
(D)
1 + v n −t d
(E)
1 + v n −t
29.
At an annual effective interest rate of i, i > 0%, the present value of a perpetuity paying 10 at the
end of each 3-year period, with the first payment at the end of year 3, is 32.
At the same annual effective rate of i, the present value of a perpetuity paying 1 at the end of
each 4-month period, with first payment at the end of 4 months, is X.
Calculate X.
(A)
31.6
(B)
32.6
(C)
33.6
(D)
34.6
(E)
35.6
16
30.
As of 12/31/2013, an insurance company has a known obligation to pay 1,000,000 on
12/31/2017. To fund this liability, the company immediately purchases 4-year 5% annual
coupon bonds totaling 822,703 of par value. The company anticipates reinvestment interest rates
to remain constant at 5% through 12/31/2017. The maturity value of the bond equals the par
value.
Consider two reinvestment interest rate movement scenarios effective 1/1/2014. Scenario A has
interest rates drop by 0.5%. Scenario B has interest rates increase by 0.5%.
Determine which of the following best describes the insurance company’s profit or (loss) as of
12/31/2017 after the liability is paid.
(A)
Scenario A – 6,610, Scenario B – 11,150
(B)
Scenario A – (14,760), Scenario B – 14,420
(C)
Scenario A – (18,910), Scenario B – 19,190
(D)
Scenario A – (1,310), Scenario B – 1,320
(E)
Scenario A – 0, Scenario B – 0
31.
An insurance company has an obligation to pay the medical costs for a claimant. Annual claim
costs today are 5000, and medical inflation is expected to be 7% per year. The claimant will
receive 20 payments.
Claim payments are made at yearly intervals, with the first claim payment to be made one year
from today.
Calculate the present value of the obligation using an annual effective interest rate of 5%.
(A)
87,900
(B)
102,500
(C)
114,600
(D)
122,600
(E)
Cannot be determined
17
32.
An investor pays 100,000 today for a 4-year investment that returns cash flows of 60,000 at the
end of each of years 3 and 4. The cash flows can be reinvested at 4.0% per annum effective.
Using an annual effective interest rate of 5.0%, calculate the net present value of this investment
today.
(A)
-1398
(B)
-699
(C)
699
(D)
1398
(E)
2,629
33.
You are given the following information with respect to a bond:
(i)
par value: 1000
(ii)
term to maturity: 3 years
(iii)
annual coupon rate: 6% payable annually
You are also given that the one, two, and three year annual spot interest rates are 7%, 8%, and
9% respectively.
Calculate the value of the bond.
(A)
906
(B)
926
(C)
930
(D)
950
(E)
1000
18
34.
You are given the following information with respect to a bond:
(i)
par value: 1000
(ii)
term to maturity: 3 years
(iii)
annual coupon rate: 6% payable annually
You are also given that the one, two, and three year annual spot interest rates are 7%, 8%, and
9% respectively.
The bond is sold at a price equal to its value.
Calculate the annual effective yield rate for the bond i.
(A)
8.1%
(B)
8.3%
(C)
8.5%
(D)
8.7%
(E)
8.9%
35.
The current price of an annual coupon bond is 100. The yield to maturity is an annual effective
rate of 8%. The derivative of the price of the bond with respect to the yield to maturity is -700.
Using the bond’s yield rate, calculate the Macaulay duration of the bond in years.
(A)
7.00
(B)
7.49
(C)
7.56
(D)
7.69
(E)
8.00
19
36.
A common stock pays a constant dividend at the end of each year into perpetuity.
Using an annual effective interest rate of 10%, calculate the Macaulay duration of the stock.
(A)
7 years
(B)
9 years
(C)
11 years
(D)
19 years
(E)
27 years
37.
A common stock pays dividends at the end of each year into perpetuity. Assume that the
dividend increases by 2% each year.
Using an annual effective interest rate of 5%, calculate the Macaulay duration of the stock in
years.
(A)
27
(B)
35
(C)
44
(D)
52
(E)
58
38. – 44. Deleted
20
45.
You are given the following information about an investment account:
(i)
The value on January 1 is 10.
(ii)
The value on July 1, prior to a deposit being made, is 12.
(iii)
On July 1, a deposit of X is made.
(iv)
The value on December 31 is X.
Over the year, the time-weighted return is 0%, and the dollar-weighted (money-weighted) return
is Y.
Calculate Y.
(A)
-25%
(B)
-10%
(C)
0%
(D)
10%
(E)
25%
46.
Seth borrows X for four years at an annual effective interest rate of 8%, to be repaid with equal
payments at the end of each year. The outstanding loan balance at the end of the third year is
559.12.
Calculate the principal repaid in the first payment.
(A)
444
(B)
454
(C)
464
(D)
474
(E)
484
21
47.
Bill buys a 10-year 1000 par value bond with semi-annual coupons paid at an annual rate of 6%.
The price assumes an annual nominal yield of 6%, compounded semi-annually.
As Bill receives each coupon payment, he immediately puts the money into an account earning
interest at an annual effective rate of i.
At the end of 10 years, immediately after Bill receives the final coupon payment and the
redemption value of the bond, Bill has earned an annual effective yield of 7% on his investment
in the bond.
Calculate i.
(A)
9.50%
(B)
9.75%
(C)
10.00%
(D)
10.25%
(E)
10.50%
48.
A man turns 40 today and wishes to provide supplemental retirement income of 3000 at the
beginning of each month starting on his 65th birthday. Starting today, he makes monthly
contributions of X to a fund for 25 years. The fund earns an annual nominal interest rate of 8%
compounded monthly.
On his 65th birthday, each 1000 of the fund will provide 9.65 of income at the beginning of each
month starting immediately and continuing as long as he survives.
Calculate X.
(A)
324.70
(B)
326.90
(C)
328.10
(D)
355.50
(E)
450.70
22
49.
Happy and financially astute parents decide at the birth of their daughter that they will need to
provide 50,000 at each of their daughter’s 18th, 19th, 20th and 21st birthdays to fund her college
education. They plan to contribute X at each of their daughter’s 1st through 17th birthdays to fund
the four 50,000 withdrawals. They anticipate earning a constant 5% annual effective interest rate
on their contributions.
Let v = 1/1.05 .
Determine which of the following equations of value can be used to calculate X.
(A)
17
X∑
v k 50, 000[v + v 2 + v 3 + v 4 ]
=
k =1
(B)
16
X ∑=
1.05k 50, 000[1 + v + v 2 + v 3 ]
k =1
(C)
17
X ∑=
1.05k 50, 000[1 + v + v 2 + v 3 ]
k =0
(D)
17
X ∑=
1.05k 50, 000[1 + v + v 2 + v 3 ]
k =1
(E)
17
X=
∑ v k 50, 000[v18 + v19 + v 20 + v 21 + v 22 ]
k =0
50.
Deleted
23
51.
Joe must pay liabilities of 1,000 due 6 months from now and another 1,000 due one year from
now. There are two available investments:
Bond I: A 6-month bond with face amount of 1,000, an 8% nominal annual coupon rate
convertible semiannually, and a 6% nominal annual yield rate convertible semiannually;
Bond II: A one-year bond with face amount of 1,000, a 5% nominal annual coupon rate
convertible semiannually, and a 7% nominal annual yield rate convertible semiannually.
Calculate the amount of each bond that Joe should purchase to exactly match the liabilities.
(A)
Bond I – 1, Bond II – 0.97561
(B)
Bond I – 0.93809, Bond II – 1
(C)
Bond I – 0.97561, Bond II – 0.94293
(D)
Bond I – 0.93809, Bond II – 0.97561
(E)
Bond I – 0.98345, Bond II – 0.97561
52.
Joe must pay liabilities of 2000 due one year from now and another 1000 due two years from
now. He exactly matches his liabilities with the following two investments:
Mortgage I: A one year mortgage in which X is lent. It is repaid with a single payment at time
one. The annual effective interest rate is 6%.
Mortgage II: A two-year mortgage in which Y is lent. It is repaid with two equal annual
payments. The annual effective interest rate is 7%.
Calculate X + Y.
(A)
2600
(B)
2682
(C)
2751
(D)
2825
(E)
3000
24
53.
Joe must pay liabilities of 1,000 due one year from now and another 2,000 due three years from
now. There are two available investments:
Bond I: A one-year zero-coupon bond that matures for 1000. The yield rate is 6% per year
Bond II: A two-year zero-coupon bond with face amount of 1,000. The yield rate is 7% per year.
At the present time the one-year forward rate for an investment made two years from now is
6.5%
Joe plans to buy amounts of each bond. He plans to reinvest the proceeds from Bond II in a oneyear zero-coupon bond. Assuming the reinvestment earns the forward rate, calculate the total
purchase price of Bond I and Bond II where the amounts are selected to exactly match the
liabilities.
(A)
2584
(B)
2697
(C)
2801
(D)
2907
(E)
3000
54.
Matt purchased a 20-year par value bond with an annual nominal coupon rate of 8% payable
semiannually at a price of 1722.25. The bond can be called at par value X on any coupon date
starting at the end of year 15 after the coupon is paid. The lowest yield rate that Matt can
possibly receive is a nominal annual interest rate of 6% convertible semiannually.
Calculate X.
(A)
1400
(B)
1420
(C)
1440
(D)
1460
(E)
1480
25
55.
Toby purchased a 20-year par value bond with semiannual coupons of 40 and a redemption value
of 1100. The bond can be called at 1200 on any coupon date prior to maturity, starting at the end
of year 15.
Calculate the maximum price of the bond to guarantee that Toby will earn an annual nominal
interest rate of at least 6% convertible semiannually.
(A)
1251
(B)
1262
(C)
1278
(D)
1286
(E)
1295
56.
Sue purchased a 10-year par value bond with an annual nominal coupon rate of 4% payable
semiannually at a price of 1021.50. The bond can be called at par value X on any coupon date
starting at the end of year 5. The lowest yield rate that Sue can possibly receive is an annual
nominal rate of 6% convertible semiannually.
Calculate X.
(A)
1120
(B)
1140
(C)
1160
(D)
1180
(E)
1200
26
57.
Mary purchased a 10-year par value bond with an annual nominal coupon rate of 4% payable
semiannually at a price of 1021.50. The bond can be called at 100 over the par value of 1100 on
any coupon date starting at the end of year 5 and ending six months prior to maturity.
Calculate the minimum yield that Mary could receive, expressed as an annual nominal rate of
interest convertible semiannually.
(A)
4.7%
(B)
4.9%
(C)
5.1%
(D)
5.3%
(E)
5.5%
58. Deleted
59.
A liability consists of a series of 15 annual payments of 35,000 with the first payment to be made
one year from now.
The assets available to immunize this liability are five-year and ten-year zero-coupon bonds.
The annual effective interest rate used to value the assets and the liability is 6.2%. The liability
has the same present value and duration as the asset portfolio.
Calculate the amount invested in the five-year zero-coupon bonds.
(A)
127,000
(B)
167,800
(C)
208,600
(D)
247,900
(E)
292,800
27
60.
You are given the following information about a loan of L that is to be repaid with a series of 16
annual payments:
(i)
The first payment of 2000 is due one year from now.
(ii)
The next seven payments are each 3% larger than the preceding payment.
(iii)
From the 9th to the 16th payment, each payment will be 3% less than the preceding
payment.
(iv)
The loan has an annual effective interest rate of 7%.
Calculate L.
(A)
20,689
(B)
20,716
(C)
20,775
(D)
21,147
(E)
22,137
61.
The annual force of interest credited to a savings account is defined by
t2
δ t = 1003
t
3+
150
with t in years. Austin deposits 500 into this account at time 0.
Calculate the time in years it will take for the fund to be worth 2000.
(A)
6.7
(B)
8.8
(C)
14.2
(D)
16.5
(E)
18.9
28
62.
A 40-year bond is purchased at a discount. The bond pays annual coupons. The amount for
accumulation of discount in the 15th coupon is 194.82. The amount for accumulation of discount
in the 20th coupon is 306.69.
Calculate the amount of discount in the purchase price of this bond.
(A)
13,635
(B)
13,834
(C)
16,098
(D)
19,301
(E)
21,135
63.
Tanner takes out a loan today and repays the loan with eight level annual payments, with the first
payment one year from today. The payments are calculated based on an annual effective interest
rate of 4.75%. The principal portion of the fifth payment is 699.68.
Calculate the total amount of interest paid on this loan.
(A)
1239
(B)
1647
(C)
1820
(D)
2319
(E)
2924
29
64.
Turner buys a new car and finances it with a loan of 22,000. He will make n monthly payments
of 450.30 starting in one month. He will make one larger payment in n+1 months to pay off the
loan. Payments are calculated using an annual nominal interest rate of 8.4%, convertible
monthly. Immediately after the 18th payment he refinances the loan to pay off the remaining
balance with 24 monthly payments starting one month later. This refinanced loan uses an annual
nominal interest rate of 4.8%, convertible monthly.
Calculate the amount of the new monthly payment.
(A)
668
(B)
693
(C)
702
(D)
715
(E)
742
65.
Kylie bought a 7-year, 5000 par value bond with an annual coupon rate of 7.6% paid
semiannually. She bought the bond with no premium or discount.
Calculate the Macaulay duration of this bond with respect to the yield rate on the bond.
(A)
5.16
(B)
5.35
(C)
5.56
(D)
5.77
(E)
5.99
30
66.
Krishna buys an n-year 1000 bond at par. The Macaulay duration is 7.959 years using an annual
effective interest rate of 7.2%.
Calculate the estimated price of the bond, using the first-order modified approximation, if the
interest rate rises to 8.0%.
(A)
940.60
(B)
942.88
(C)
944.56
(D)
947.03
(E)
948.47
67.
The prices of zero-coupon bonds are:
Maturity
Price
1
0.95420
2
0.90703
3
0.85892
Calculate the one-year forward rate, deferred two years.
(A)
0.048
(B)
0.050
(C)
0.052
(D)
0.054
(E)
0.056
31
68.
Sam buys an eight-year, 5000 par bond with an annual coupon rate of 5%, paid annually. The
bond sells for 5000. Let d1 be the Macaulay duration just before the first coupon is paid. Let
d 2 be the Macaulay duration just after the first coupon is paid.
Calculate
d1
.
d2
(A)
0.91
(B)
0.93
(C)
0.95
(D)
0.97
(E)
1.00
69.
An insurance company must pay liabilities of 99 at the end of one year, 102 at the end of two
years and 100 at the end of three years. The only investments available to the company are the
following three bonds. Bond A and Bond C are annual coupon bonds. Bond B is a zero-coupon
bond.
Bond Maturity (in years)
Yield-to-Maturity (Annualized)
Coupon Rate
A
1
6%
7%
B
2
7%
0%
C
3
9%
5%
All three bonds have a par value of 100 and will be redeemed at par.
Calculate the number of units of Bond A that must be purchased to match the liabilities exactly.
(A)
0.8807
(B)
0.8901
(C)
0.8975
(D)
0.9524
(E)
0.9724
32
70.
Determine which of the following statements is false with respect to Redington immunization.
(A)
Modified duration may change at different rates for each of the assets and
liabilities as time goes by.
(B)
Redington immunization requires infrequent rebalancing to keep modified
duration of assets equal to modified duration of liabilities.
(C)
This technique is designed to work only for small changes in the interest rate.
(D)
The yield curve is assumed to be flat.
(E)
The yield curve shifts in parallel when the interest rate changes.
71.
Aakash has a liability of 6000 due in four years. This liability will be met with payments of A in
two years and B in six years. Aakash is employing a full immunization strategy using an annual
effective interest rate of 5%.
Calculate A − B .
(A)
0
(B)
146
(C)
293
(D)
586
(E)
881
33
72.
Jia Wen has a liability of 12,000 due in eight years. This liability will be met with payments of
5000 in five years and B in 8 + b years. Jia Wen is employing a full immunization strategy
using an annual effective interest rate of 3%.
Calculate
B
.
b
(A)
2807
(B)
2873
(C)
2902
(D)
2976
(E)
3019
73.
Trevor has assets at time 2 of A and at time 9 of B. He has a liability of 95,000 at time 5. Trevor
has achieved Redington immunization in his portfolio using an annual effective interest rate of
4%.
Calculate
A
.
B
(A)
0.7307
(B)
0.9670
(C)
1.0000
(D)
1.0132
(E)
1.3686
34
74.
You are given the following information about two bonds, Bond A and Bond B:
i) Each bond is a 10-year bond with semiannual coupons redeemable at its par value of
10,000, and is bought to yield an annual nominal interest rate of i, convertible
semiannually.
ii) Bond A has an annual coupon rate of (i + 0.04), paid semiannually.
iii) Bond B has an annual coupon rate of (i – 0.04), paid semiannually.
iv) The price of Bond A is 5,341.12 greater than the price of Bond B.
Calculate i.
(A)
0.042
(B)
0.043
(C)
0.081
(D)
0.084
(E)
0.086
75.
A borrower takes out a 15-year loan for 400,000, with level end-of-month payments, at an annual
nominal interest rate of 9% convertible monthly.
Immediately after the 36th payment, the borrower decides to refinance the loan at an annual
nominal interest rate of j, convertible monthly. The remaining term of the loan is kept at twelve
years, and level payments continue to be made at the end of the month. However, each payment
is now 409.88 lower than each payment from the original loan.
Calculate j.
(A)
4.72%
(B)
5.75%
(C)
6.35 %
(D)
6.90%
(E)
9.14%
35
76.
Consider two 30-year bonds with the same purchase price. Each has an annual coupon rate of
5% paid semiannually and a par value of 1000.
The first bond has an annual nominal yield rate of 5% compounded semiannually, and a
redemption value of 1200.
The second bond has an annual nominal yield rate of j compounded semiannually, and a
redemption value of 800.
Calculate j.
(A)
2.20%
(B)
2.34%
(C)
3.53%
(D)
4.40%
(E)
4.69%
77.
Lucas opens a bank account with 1000 and lets it accumulate at an annual nominal interest rate
of 6% convertible semiannually. Danielle also opens a bank account with 1000 at the same time
as Lucas, but it grows at an annual nominal interest rate of 3% convertible monthly.
For each account, interest is credited only at the end of each interest conversion period.
Calculate the number of months required for the amount in Lucas’s account to be at least double
the amount in Danielle’s account.
(A)
276
(B)
282
(C)
285
(D)
286
(E)
288
36
78.
On January 1, an investment fund was opened with an initial balance of 5000. Just after the
balance grew to 5200 on July 1, an additional 2600 was deposited.
The annual effective yield rate for this fund was 9.00% over the calendar year.
Calculate the time-weighted rate of return for the year.
(A)
7.43%
(B)
8.86%
(C)
9.00%
(D)
9.17%
(E)
10.45%
79.
Bill and Joe each put 10 into separate accounts at time t = 0, where t is measured in years.
Bill’s account earns interest at a constant annual effective interest rate of K/25, K > 0.
Joe’s account earns interest at a force of interest, δ t =
1
.
K + 0.25t
At the end of four years, the amount in each account is X.
Calculate X.
(A)
20.7
(B)
21.7
(C)
22.7
(D)
23.7
(E)
24.7
37
80. Deleted
81.
A borrower takes out a 50-year loan, to be repaid with payments at the end of each year. The
loan payment is 2500 for each of the first 26 years. Thereafter, the payments decrease by 100
per year. Interest on the loan is charged at an annual effective rate of i (0% < i < 10%).
The principal repaid in year 26 is X.
Determine the amount of interest paid in the first year.
(A)
Xv 25
(B)
2500v 25 − Xv 25
(C)
2500 – X
(D)
2500 − XV 25
(E)
25Xi
38
82.
You are given:
i)
F = the amount in a fund at the beginning of the year
ii)
There are n cash flows during the year, where each cash flow, Ck , k = 1, 2, , n is made
at time tk , 0 < t ≤ 1 .
iii)
I = the amount of interest earned during the year.
Consider the formula
i=
I
n
F + ∑ Ck (1 − tk )
.
k =1
Determine which of the following conditions produces i closest to the annual effective yield rate.
(A)
When each cash flow is small relative to F
(B)
When each cash flow is large relative to F
(C)
When each cash flow is large relative to I
(D)
When the cash flows all have the same sign
(E)
When the timing of cash flows is uniform throughout the year
83.
On January 1, a fund is worth 100,000. On May 1, the value has increased to 120,000 and then
30,000 of new principal is deposited. On November 1, the value has declined to 130,000 and
then 50,000 is withdrawn. On January 1 of the following year, the fund is again worth 100,000.
Calculate the time-weighted rate of return.
(A)
0.00%
(B)
17.91%
(C)
25.00%
(D)
29.27%
(E)
30.00%
39
84.
John made a deposit of 1000 into a fund at the beginning of each year for 20 years.
At the end of 20 years, he began making semiannual withdrawals of 3000 at the beginning of
each six months, with a smaller final withdrawal to exhaust the fund. The fund earned an annual
effective interest rate of 8.16%.
Calculate the amount of the final withdrawal.
(A)
561
(B)
1226
(C)
1430
(D)
1488
(E)
2240
85.
The present value of a perpetuity paying 1 every two years with first payment due immediately is
7.21 at an annual effective rate of i.
Another perpetuity paying R every three years with the first payment due at the beginning of year
two has the same present value at an annual effective rate of i + 0.01.
Calculate R.
(A)
1.23
(B)
1.56
(C)
1.60
(D)
1.74
(E)
1.94
40
86.
A loan of 10,000 is repaid with a payment made at the end of each year for 20 years.
The payments are 100, 200, 300, 400, and 500 in years 1 through 5, respectively. In the
subsequent 15 years, equal annual payments of X are made.
The annual effective interest rate is 5%.
Calculate X.
(A)
842
(B)
977
(C)
1017
(D)
1029
(E)
1075
87.
An investor wishes to accumulate 5000 in a fund at the end of 15 years. To accomplish this, she
plans to make equal deposits of X at the end of each year for the first ten years. The fund earns
an annual effective rate of 6% during the first ten years and 5% for the next five years.
Calculate X.
(A)
224
(B)
284
(C)
297
(D)
312
(E)
379
41
88.
A borrower takes out a 15-year loan for 65,000, with level end-of-month payments. The annual
nominal interest rate of the loan is 8%, convertible monthly.
Immediately after the 12th payment is made, the remaining loan balance is reamortized. The
maturity date of the loan remains unchanged, but the annual nominal interest rate of the loan is
changed to 6%, convertible monthly.
Calculate the new end-of-month payment.
(A)
528
(B)
534
(C)
540
(D)
546
(E)
552
89.
College tuition is 6000 for the current school year, payable in full at the beginning of the school
year. College tuition will grow at an annual rate of 5%. A parent sets up a college savings fund
earning interest at an annual effective rate of 7%. The parent deposits 750 at the beginning of
each school year for 18 years, with the first deposit made at the beginning of the current school
year. Immediately following the 18th deposit, the parent pays tuition for the 18th school year
from the fund.
The amount of money needed, in addition to the balance in the fund, to pay tuition at the
beginning of the 19th school year is X.
Calculate X.
(A)
1439
(B)
1545
(C)
1664
(D)
1785
(E)
1870
42
90.
A 1000 par value 20-year bond sells for P and yields a nominal interest rate of 10% convertible
semiannually. The bond has 9% coupons payable semiannually and a redemption value of 1200.
Calculate P.
(A)
914
(B)
943
(C)
1013
(D)
1034
(E)
1097
91.
An investor purchases a 10-year callable bond with face amount of 1000 for price P. The bond
has an annual nominal coupon rate of 10% paid semi-annually.
The bond may be called at par by the issuer on every other coupon payment date, beginning with
the second coupon payment date.
The investor earns at least an annual nominal yield of 12% compounded semi-annually
regardless of when the bond is redeemed.
Calculate the largest possible value of P.
(A)
885
(B)
892
(C)
926
(D)
965
(E)
982
43
92.
You are given the following term structure of interest rates:
Length of investment in years
1
2
3
4
5
6
Spot rate
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
Calculate the one-year forward rate, deferred four years, implied by this term structure.
(A)
9.5%
(B)
10.0%
(C)
11.5%
(D)
12.0%
(E)
12.5%
93.
Seth has two retirement benefit options.
His first option is to receive a lump sum of 374,500 at retirement.
His second option is to receive monthly payments for 25 years starting one month after
retirement. For the first year, the amount of each monthly payment is 2000. For each
subsequent year, the monthly payments are 2% more than the monthly payments from the
previous year.
Using an annual nominal interest rate of 6%, compounded monthly, the present value of the
second option is P.
Determine which of the following is true.
(A)
P is 323,440 more than the lump sum option amount.
(B)
P is 107,170 more than the lump sum option amount.
(C)
The lump sum option amount is equal to P.
(D)
The lump sum option amount is 60 more than P.
(E)
The lump sum option amount is 64,090 more than P.
44
94.
A couple decides to save money for their child's first year college tuition.
The parents will deposit 1700 n months from today and another 3400 2n months from today.
All deposits earn interest at a nominal annual rate of 7.2%, compounded monthly.
Calculate the maximum integral value of n such that the parents will have accumulated at least
6500 five years from today.
(A)
11
(B)
12
(C)
18
(D)
24
(E)
25
95.
Let S be the accumulated value of 1000 invested for two years at a nominal annual rate of
discount d convertible semiannually, which is equivalent to an annual effective interest rate of i.
Let T be the accumulated value of 1000 invested for one year at a nominal annual rate of
discount d convertible quarterly.
S / T = (39 / 38) 4 .
Calculate i.
(A)
10.0%
(B)
10.3%
(C)
10.8%
(D)
10.9%
(E)
11.1%
45
96,
An investor’s retirement account pays an annual nominal interest rate of 4.2%, convertible
monthly.
On January 1 of year y, the investor’s account balance was X. The investor then deposited 100 at
the end of every quarter. On May 1 of year (y + 10), the account balance was 1.9X.
Determine which of the following is an equation of value that can be used to solve for X.
(A)
1.9 X
(1.0105)
100
=
X
k −1
k =1 (1.0105)
42
124
3
+∑
100
1.9 X
=
3( k −1)
(1.0035)124
k =1 (1.0035)
42
(B)
X +∑
(C)
X +∑
(D)
X +∑
(E)
X +∑
100
1.9 X
=
3k
(1.0035)124
k =1 (1.0035)
41
100
1.9 X
=
124
k −1
k =1 (1.0105)
(1.0105) 3
41
100
1.9 X
=
124
k −1
k =1 (1.0105)
(1.0105) 3
42
97.
Five deposits of 100 are made into a fund at two-year intervals with the first deposit at the
beginning of the first year.
The fund earns interest at an annual effective rate of 4% during the first six years and at an
annual effective rate of 5% thereafter.
Calculate the annual effective yield rate earned over the investment period ending at the end of
the tenth year.
(A)
4.18%
(B)
4.40%
(C)
4.50%
(D)
4.58%
(E)
4.78%
46
98.
John finances his daughter’s college education by making deposits into a fund earning interest at
an annual effective rate of 8%. For 18 years he deposits X at the beginning of each month.
In the 16th through the 19th years, he makes a withdrawal of 25,000 at the beginning of each year.
The final withdrawal reduces the fund balance to zero.
Calculate X.
(A)
207
(B)
223
(C)
240
(D)
245
(E)
260
99.
Jack inherited a perpetuity-due, with annual payments of 15,000. He immediately exchanged the
perpetuity for a 25-year annuity-due having the same present value. The annuity-due has annual
payments of X.
All the present values are based on an annual effective interest rate of 10% for the first 10 years
and 8% thereafter.
Calculate X.
(A)
16,942
(B)
17,384
(C)
17,434
(D)
17,520
(E)
18,989
47
100.
An investor owns a bond that is redeemable for 300 in seven years. The investor has just
received a coupon of 22.50 and each subsequent semiannual coupon will be X more than the
preceding coupon. The present value of this bond immediately after the payment of the coupon
is 1050.50 assuming an annual nominal yield rate of 6% convertible semiannually.
Calculate X.
(A)
7.54
(B)
10.04
(C)
22.37
(D)
34.49
(E)
43.98
101.
A 30-year annuity is arranged to pay off a loan taken out today at a 5% annual effective interest
rate. The first payment of the annuity is due in ten years in the amount of 1,000. The subsequent
payments increase by 500 each year.
Calculate the amount of the loan.
(A)
58,283
(B)
61,197
(C)
64,021
(D)
64,257
(E)
69,211
48
102.
A woman worked for 30 years before retiring. At the end of the first year of employment she
deposited 5000 into an account for her retirement. At the end of each subsequent year of
employment, she deposited 3% more than the prior year. The woman made a total of 30
deposits.
She will withdraw 50,000 at the beginning of the first year of retirement and will make annual
withdrawals at the beginning of each subsequent year for a total of 30 withdrawals. Each of
these subsequent withdrawals will be 3% more than the prior year. The final withdrawal
depletes the account.
The account earns a constant annual effective interest rate.
Calculate the account balance after the final deposit and before the first withdrawal.
(A)
760,694
(B)
783,948
(C)
797,837
(D)
805,541
(E)
821,379
103.
An insurance company purchases a perpetuity-due providing a geometric series of quarterly
payments for a price of 100,000 based on an annual effective interest rate of i. The first and
second quarterly payments are 2000 and 2010, respectively.
Calculate i.
(A)
10.0%
(B)
10.2%
(C)
10.4%
(D)
10.6%
(E)
10.8%
49
104.
A perpetuity provides for continuous payments. The annual rate of payment at time t is
1,

t −10
(1.03)
for 0 ≤ t < 10,
for t ≥ 10.
Using an annual effective interest rate of 6%, the present value at time t = 0 of this perpetuity is
x.
Calculate x.
(A)
27.03
(B)
30.29
(C)
34.83
(D)
38.64
(E)
42.41
105.
A bank agrees to lend 10,000 now and X three years from now in exchange for a single
repayment of 75,000 at the end of 10 years. The bank charges interest at an annual effective rate
1
of 6% for the first 5 years and at a force of interest δ t =
for t ≥ 5 .
t +1
Calculate X.
(A)
23,500
(B)
24,000
(C)
24,500
(D)
25,000
(E)
25,500
50
106.
A company takes out a loan of 15,000,000 at an annual effective discount rate of 5.5%. You are
given:
i)
The loan is to be repaid with n annual payments of 1,200,000 plus a drop payment
one year after the nth payment.
ii)
The first payment is due three years after the loan is taken out.
Calculate the amount of the drop payment.
(A)
79,100
(B)
176,000
(C)
321,300
(D)
959,500
(E)
1,180,300
107.
Tim takes out an n-year loan with equal annual payments at the end of each year.
The interest portion of the payment at time (n − 1) is equal to 0.5250 of the interest portion of the
payment at time (n − 3) and is also equal to 0.1427 of the interest portion of the first payment.
Calculate n.
(A)
18
(B)
20
(C)
22
(D)
24
(E)
26
51
108. Deleted
109.
On January 1, 2003 Mike took out a 30-year mortgage loan in the amount of 200,000 at an
annual nominal interest rate of 6% compounded monthly. The loan was to be repaid by level
end-of-month payments with the first payment on January 31, 2003.
Mike repaid an extra 10,000 in addition to the regular monthly payment on each December 31 in
the years 2003 through 2007.
Determine the date on which Mike will make his last payment (which is a drop payment).
(A)
July 31, 2013
(B)
November 30, 2020
(C)
December 31, 2020
(D)
December 31, 2021
(E)
January 31, 2022
52
110.
A 5-year loan of 500,000 with an annual effective discount rate of 8% is to be repaid by level
end-of-year payments.
If the first four payments had been rounded up to the next multiple of 1,000, the final payment
would be X.
Calculate X.
(A)
103,500
(B)
111,700
(C)
115,200
(D)
125,200
(E)
127,500
111.
A company plans to invest X at the beginning of each month in a zero-coupon bond in order to
accumulate 100,000 at the end of six months. The price of each bond as a percentage of
redemption value is given in the following chart:
Maturity (months)
1
2
3
4
5
6
Price
99%
98%
97%
96%
95%
94%
Calculate X given that the bond prices will not change during the six-month period.
(A)
15,667
(B)
16,078
(C)
16,245
(D)
16,667
(E)
17,271
53
112.
A loan of X is repaid with level annual payments at the end of each year for 10 years.
You are given:
i)
The interest paid in the first year is 3600; and
ii)
The principal repaid in the 6th year is 4871.
Calculate X.
(A)
44,000
(B)
45,250
(C)
46,500
(D)
48,000
(E)
50,000
113.
An investor purchased a 25-year bond with semiannual coupons, redeemable at par, for a price of
10,000. The annual effective yield rate is 7.05%, and the annual coupon rate is 7%.
Calculate the redemption value of the bond.
(A)
9,918
(B)
9,942
(C)
9,981
(D)
10,059
(E)
10,083
54
114.
Jeff has 8000 and would like to purchase a 10,000 bond. In doing so, Jeff takes out a 10 year
loan of 2000 from a bank and will make interest-only payments at the end of each month at a
nominal rate of 8.0% convertible monthly. He immediately pays 10,000 for a 10-year bond with
a par value of 10,000 and 9.0% coupons paid monthly.
Calculate the annual effective yield rate that Jeff will realize on his 8000 over the 10-year period.
(A)
9.30%
(B)
9.65%
(C)
10.00%
(D)
10.35%
(E)
10.70%
115.
A bank issues three annual coupon bonds redeemable at par, all with the same term, price, and
annual effective yield rate.
The first bond has face value 1000 and annual coupon rate 5.28%.
The second bond has face value 1100 and annual coupon rate 4.40%.
The third bond has face value 1320 and annual coupon rate r.
Calculate r.
(A)
2.46%
(B)
2.93%
(C)
3.52%
(D)
3.67%
(E)
4.00%
55
116.
An investor owns a bond that is redeemable for 250 in 6 years from now. The investor has just
received a coupon of c and each subsequent semiannual coupon will be 2% larger than the
preceding coupon. The present value of this bond immediately after the payment of the coupon
is 582.53 assuming an annual effective yield rate of 4%.
Calculate c.
(A)
32.04
(B)
32.68
(C)
40.22
(D)
48.48
(E)
49.45
117.
An n-year bond with annual coupons has the following characteristics:
i)
The redemption value at maturity is 1890;
ii)
The annual effective yield rate is 6%;
iii)
The book value immediately after the third coupon is 1254.87; and
iv)
The book value immediately after the fourth coupon is 1277.38.
Calculate n.
(A)
16
(B)
17
(C)
18
(D)
19
(E)
20
56
118.
An n-year bond with semiannual coupons has the following characteristics:
i)
The par value and redemption value are 2500;
ii)
The annual coupon rate is 7% payable semi-annually;
iii)
The annual nominal yield to maturity is 8% convertible semiannually; and
iv)
The book value immediately after the fourth coupon is 8.44 greater than the book
value immediately after the third coupon.
Calculate n.
(A)
6.5
B)
7.0
(C)
9.5
(D)
12.0
(E)
14.0
119.
The one-year forward rates, deferred t years, are estimated to be:
Year (t)
Forward Rate
0
1
2
3
4
4%
6%
8%
10%
12%
Calculate the spot rate for a zero-coupon bond maturing three years from now.
(A)
4%
(B)
5%
(C)
6%
(D)
7%
(E)
8%
57
120.
On January 1, an investment account is worth 50,000. On May 1, the value has increased to
52,000 and 8,000 of new principal is deposited. At time t, in years, (4/12 < t < 1) the value of the
fund has increased to 62,000 and 10,000 is withdrawn. On January 1 of the next year, the
investment account is worth 55,000. The dollar-weighted rate of return (using the simple interest
approximation) is equal to the time-weighted rate of return for the year.
Calculate t.
(A)
0.411
(B)
0.415
(C)
0.585
(D)
0.589
(E)
0.855
121.
Annuity A pays 1 at the beginning of each year for three years. Annuity B pays 1 at the
beginning of each year for four years.
The Macaulay duration of Annuity A at the time of purchase is 0.93. Both annuities offer the
same yield rate.
Calculate the Macaulay duration of Annuity B at the time of purchase.
(A)
1.240
(B)
1.369
(C)
1.500
(D)
1.930
(E)
1.965
58
122.
Cash flows are 40,000 at time 2 (in years), 25,000 at time 3, and 100,000 at time 4. The annual
effective yield rate is 7.0%.
Calculate the Macaulay duration.
(A)
2.2
(B)
2.3
(C)
3.1
(D)
3.3
(E)
3.4
123. Deleted
124.
Rhonda purchases a perpetuity providing a payment of 1 at the beginning of each year. The
perpetuity’s Macaulay duration is 30 years.
Calculate the modified duration of this perpetuity.
(A)
28.97
(B)
29.00
(C)
29.03
(D)
29.07
(E)
29.10
59
125.
Stocks F and J are valued using the dividend discount model. The required annual effective rate
of return is 8.8%. The dividend of Stock F has an annual growth rate of g and the dividend of
Stock J has an annual growth rate of –g.
The dividends of both stocks are paid annually on the same date.
The value of Stock F is twice the value of Stock J. The next dividend on Stock F is half of the
next dividend on Stock J.
Calculate g.
(A)
0.0%
(B)
0.8%
(C)
2.9%
(D)
5.3%
(E)
8.8%
126.
Which of the following statements regarding immunization are true?
I.
If long-term interest rates are lower than short-term rates, the need for
immunization is reduced.
II.
Either Macaulay or modified duration can be used to develop an immunization
strategy.
III.
Both processes of matching the present values of the flows or the flows
themselves will produce exact matching.
(A)
I only
(B)
II only
(C)
III only
(D)
I, II and III
(E)
The correct answer is not given by (A), (B), (C), or (D).
60
127.
A company owes 500 and 1000 to be paid at the end of year one and year four, respectively. The
company will set up an investment program to match the duration and the present value of the
above obligation using an annual effective interest rate of 10%.
The investment program produces asset cash flows of X today and Y in three years.
Calculate X and determine whether the investment program satisfies the conditions for Redington
immunization.
(A)
X = 75 and the Redington immunization conditions are not satisfied.
(B)
X = 75 and the Redington immunization conditions are satisfied.
(C)
X = 1138 and the Redington immunization conditions are not satisfied.
(D)
X = 1138 and the Redington immunization conditions are satisfied.
(E)
X = 1414 and the Redington immunization conditions are satisfied.
128.
An insurance company has a known liability of 1,000,000 that is due 8 years from now. The
technique of full immunization is to be employed. Asset I will provide a cash flow of 300,000
exactly 6 years from now. Asset II will provide a cash flow of X, exactly y years from now,
where y > 8.
The annual effective interest rate is 4%.
Calculate X.
(A)
697,100
(B)
698,600
(C)
700,000
(D)
701,500
(E)
702,900
61
129.
A company has liabilities of 573 due at the end of year 2 and 701 due at the end of year 5.
A portfolio comprises two zero-coupon bonds, Bond A and Bond B.
Determine which portfolio produces a Redington immunization of the liabilities using an annual
effective interest rate of 7.0%.
(A)
Bond A: 1-year, current price 500; Bond B: 6-years, current price 500
(B)
Bond A: 1-year, current price 572; Bond B: 6-years, current price 428
(C)
Bond A: 3-years, current price 182; Bond B: 4-years, current price 1092
(D)
Bond A: 3-years, current price 637; Bond B: 4-years, current price 637
(E)
Bond A: 3.5 years, current price 1000; Bond B: Not used
130.
A company has liabilities of 402.11 due at the end of each of the next three years. The company
will invest 1000 today to fund these payouts. The only investments available are one-year and
three-year zero-coupon bonds, and the yield curve is flat at a 10% annual effective rate. The
company wishes to match the duration of its assets to the duration of its liabilities.
Determine how much the company should invest in each bond.
(A)
366 in the one-year bond and 634 in the three-year bond.
(B)
484 in the one-year bond and 516 in the three-year bond.
(C)
500 in the one-year bond and 500 in the three-year bond.
(D)
532 in the one-year bond and 468 in the three-year bond.
(E)
634 in the one-year bond and 366 in the three-year bond.
62
131.
You are given the following information about a company's liabilities:
•
•
•
Present value: 9697
Macaulay duration: 15.24
Macaulay convexity: 242.47
The company decides to create an investment portfolio by making investments into two of the
following three zero-coupon bonds: 5-year, 15-year, and 20-year. The company would like its
position to be Redington immunized against small changes in yield rate.
The annual effective yield rate for each of the bonds is 7.5%.
Determine which of the following portfolios the company should create.
(A)
Invest 3077 for the 5-year bond and 6620 for the 20-year bond.
(B)
Invest 6620 for the 5-year bond and 3077 for the 20-year bond.
(C)
Invest 465 for the 15-year bond and 9232 for the 20-year bond.
(D)
Invest 4156 for the 15-year bond and 5541 for the 20-year bond.
(E)
Invest 9232 for the 15-year bond and 465 for the 20-year bond.
63
132.
A bank accepts a 20,000 deposit from a customer on which it guarantees to pay an annual
effective interest rate of 10% for two years. The customer needs to withdraw half of the
accumulated value at the end of the first year. The customer will withdraw the remaining value
at the end of the second year.
The bank has the following investment options available, which may be purchased in any
quantity:
Bond H:
A one-year zero-coupon bond yielding 10% annually
Bond I:
A two-year zero-coupon bond yielding 11% annually
Bond J:
A two-year bond that sells at par with 12% annual coupons
Any portion of the 20,000 deposit that is not needed to be invested in bonds is retained by the
bank as profit.
Determine which of the following investment strategies produces the highest profit for the bank
and is guaranteed to meet the customer’s withdrawal needs.
(A)
9,091 in Bond H, 8,264 in Bond I, 2,145 in Bond J
(B)
10,000 in Bond H, 10,000 in Bond I
(C)
10,000 in Bond H, 9,821 in Bond I
(D)
8,910 in Bond H, 731 in Bond I, 10,000 in Bond J
(E)
8,821 in Bond H, 10,804 in Bond J
64
133.
An insurance company wants to match liabilities of 25,000 payable in one year and 20,000
payable in two years with specific assets. The following assets are currently available:
i)
One-year bond with an annual coupon of 6.75% at par
ii)
Two-year bond with annual coupons of 4.50% at par
iii)
Two-year zero-coupon bond yielding 5.00% annual effective
Calculate the smallest amount the company needs to disburse today to purchase assets that will
exactly match these liabilities.
(A)
41,220
(B)
41,390
(C)
41,560
(D)
41,660
(E)
41,750
134.
Martha leaves an estate of 500,000. Interest on this estate is paid to John for the first X years at
the end of each year. Karen receives annual interest payments from the end of year X+1 forever.
At an annual effective interest rate of 5%, the present value of Karen’s interest payments is 1.59
times the present value of John’s.
Calculate X.
(A)
6
(B)
7
(C)
8
(D)
9
(E)
10
65
135.
At time 0, Cheryl deposits X into a bank account that credits interest at an annual effective rate of
7%. At time 3, Gomer deposits 1000 into a different bank account that credits simple interest at
an annual rate of y%. At time 5, the annual forces of interest on the two accounts are equal, and
Gomer’s account has accumulated to Z.
Calculate Z.
(A)
1160
(B)
1200
(C)
1390
(D)
1400
(E)
1510
136.
Which of the following is an expression for the present value of a perpetuity with annual
payments of 1, 2, 3, …, where the first payment will be made at the end of n years, using an
annual effective interest rate of i?
(A)
(B)
an − nv n
i
n − an
i
(C)
vn
d
(D)
vn
d2
(E)
vn
di
66
137.
Jennifer establishes an investment account to pay for college expenses for her daughter. She
plans to invest X at the beginning of each month for the next 21 years. Beginning at the end of
the 18th year, she will withdraw 20,000 annually. The final withdrawal at the end of the 21st
year will exhaust the account. She anticipates earning an annual effective yield of 8% on the
investment.
Calculate X.
(A)
137.90
(B)
142.80
(C)
146.40
(D)
150.60
(E)
154.30
138.
For a given interest rate i > 0, the present value of a 20-year continuous annuity of one dollar per
year is equal to 1.5 times the present value of a 10-year continuous annuity of one dollar per
year.
Calculate the accumulated value of a 7-year continuous annuity of one dollar per year.
(A)
5.36
(B)
5.55
(C)
8.70
(D)
9.01
(E)
9.33
67
139.
An annuity having n payments of 1 has a present value of X. The first payment is made at the
end of three years and the remaining payments are made at seven-year intervals thereafter.
Determine X.
(A)
(B)
(C)
(D)
(E)
a7 n +3 − a3
s3
a7 n +3 − a3
a7
a7 n +3 − a7
a3
a7 n +3 − a7
a7
a7 n +3 − a7
s3
140.
At an annual effective interest rate of 10.9%, each of the following are equal to X:
•
•
The accumulated value at the end of n years of an n-year annuity-immediate paying 21.80 per
year.
The present value of a perpetuity-immediate paying 19,208 at the end of each n-year period.
Calculate X.
(A)
1555
(B)
1750
(C)
1960
(D)
2174
(E)
There is not enough information given to calculate X.
68
141.
An investor decides to purchase a five-year annuity with an annual nominal interest rate of 12%
convertible monthly for a price of X.
Under the terms of the annuity, the investor is to receive 2 at the end of the first month. The
payments increase by 2 each month thereafter.
Calculate X.
(A)
2015
(B)
2386
(C)
2475
(D)
2500
(E)
2524
142.
A perpetuity-due with semi-annual payments consists of two level payments of 300, followed by
a series of increasing payments. Beginning with the third payment, each payment is 200 larger
than the preceding payment.
Using an annual effective interest rate of i, the present value of the perpetuity is 475,000.
Calculate i.
(A)
4.05%
(B)
4.09%
(C)
4.13%
(D)
4.17%
(E)
4.21%
69
143.
At an annual effective interest rate of 6%, the present value of a perpetuity immediate with
successive annual payments of 6, 8, 10, 12, ..., is equal to X.
Calculate X.
(A)
100
(B)
656
(C)
695
(D)
1767
(E)
2222
144.
A company is considering investing in a particular project. The project requires an investment of
X today. Additional investments are required at the beginning of each of the next five years,
with each year’s investment 5% greater than the previous year’s investment.
The investment is expected to produce an income of 100 per year at the end of each year forever,
with the first payment expected at the end of the first year.
At an annual effective interest rate of 10.25%, the project has a net present value of zero.
Calculate X.
(A)
183
(B)
192
(C)
205
(D)
215
(E)
225
70
145.
A perpetuity-due with annual payments consists of ten level payments of X followed by a series
of increasing payments. Beginning with the eleventh payment, each payment is 1.5% larger than
the preceding payment.
Using an annual effective interest rate of 5%, the present value of the perpetuity is 45,000.
Calculate X.
(A)
1,679
(B)
1,696
(C)
1,737
(D)
1,763
(E)
1,781
146.
A family purchases a perpetuity-immediate that provides annual payments that decrease by 0.4%
each year. The price of the perpetuity is 10,000 at an annual force of interest of 0.06.
Calculate the amount of the perpetuity’s first payment.
(A)
604
(B)
620
(C)
640
(D)
658
(E)
678
71
147.
Company X received the approval to start no more than two projects in the current calendar year.
Three different projects were recommended, each of which requires an investment of 800 to be
made at the beginning of the year.
The cash flows for each of the three projects are as follows:
End of year
Project A
Project B
Project C
1
500
500
500
2
500
300
250
3
–175
–175
–175
4
100
150
200
5
0
200
200
The company uses an annual effective interest rate of 10% to discount its cash flows.
Determine which combination of projects the company should select.
(A)
Projects A and B
(B)
Projects B and C
(C)
Projects A and C
(D)
Project A only
(E)
Project B only
72
148.
A borrower took out a loan of 100,000 and promised to repay it with a payment at the end of
each year for 30 years.
The amount of each of the first ten payments equals the amount of interest due. The amount of
each of the next ten payments equals 150% of the amount of interest due. The amount of each of
the last ten payments is X.
The lender charges interest at an annual effective rate of 10%.
Calculate X.
(A)
3,204
(B)
5,675
(C)
7,073
(D)
9,744
(E)
11,746
149.
A borrower takes out a loan of 4000 at an annual effective interest rate of 6%.
Starting at the end of the fifth year, the loan is repaid by annual payments, each of which equals
600 except for a final balloon payment that is less than 1000.
Calculate the final balloon payment.
(A)
616
(B)
639
(C)
642
(D)
688
(E)
696
73
150.
A loan of 20,000 is repaid by a payment of X at the end of each year for 10 years. The loan has
an annual effective interest rate of 11% for the first five years and 12% thereafter.
Calculate X.
(A)
2739.5
(B)
3078.5
(C)
3427.5
(D)
3467.5
(E)
3484.5
151.
A 16-year loan of L is repaid with a payment at the end of each year. During the first eight
years, the payment is 100. During the final eight years, the payment is 300. Interest is charged
on the loan at an annual effective rate of i, such that 1/ (1 + i )8 > 0.3.
After the first payment of 100 is made, the outstanding principal is L + 25.
Calculate the outstanding balance on the loan immediately after the eighth annual payment of
100 has been made.
(A)
1660
(B)
1760
(C)
1870
(D)
1970
(E)
2080
74
152.
An entrepreneur takes out a business loan for 60,000 with a nominal annual interest rate
compounded monthly. The loan is scheduled to be paid off with level monthly payments, plus a
final drop payment. All payments will be made at the end of the month.
The principal portion of the payment is 1,400 for the first month and 1,414 for the second month.
Calculate the drop payment.
(A)
780
(B)
788
(C)
1183
(D)
1676
(E)
1692
153.
A student borrows money to pay for university tuition. He borrows 1000 at the end of each
month for four years. No payments are made to repay the loan until the end of five years.
The loan accumulates interest at a 6% nominal interest rate convertible monthly for the first two
years and at an 8% nominal interest rate convertible monthly for the following two years.
Calculate the loan balance at the end of four years immediately following the receipt of the final
1000.
(A)
54,098
(B)
55,224
(C)
55,762
(D)
56,134
(E)
56,350
75
154. Deleted
155 (former Question 23 from the set of financial economics questions).
You are given the following spot rates:
Years to Maturity
1
2
3
4
5
Spot Rate
4.00%
4.50%
5.25%
6.25%
7.50%
You enter into a 5-year interest rate swap (with a notional amount of 100,000) to pay a fixed rate
and to receive a floating rate based on future 1-year LIBOR rates. If the swap has annual
payments, what is the fixed rate you should pay?
(A)
5.20%
(B)
5.70%
(C)
6.20%
(D)
6.70%
(E)
7.20%
156 (former Question 63 from the set of financial economics questions).
Company ABC has an existing debt of 2,000,000 on which it makes annual payments at an
annual effective rate of LIBOR plus 0.5%.
ABC decides to enter into a swap with a notional amount of 2,000,000, on which it makes annual
payments at a fixed annual effective rate of 3% in exchange for receiving annual payments at the
annual effective LIBOR rate.
The annual effective LIBOR rates over the first and second years of the swap contract are 2.5%
and 4.0%, respectively.
ABC does not make or receive any other payments.
Calculate the net interest payment that ABC makes in the second year.
(A)
50,000
(B)
60,000
(C)
70,000
(D)
80,000
(E)
90,000
76
157 DELETED
158.
The table below shows the spot rates for the given lengths of time.
Number of Years
Effective annual spot rate
1
2.5%
2
3.1%
3
3.4%
4
3.6%
5
4.0%
6
4.2%
Calculate the swap rate for a two-year deferred, three-year interest rate swap with settlement at
the end of the year.
(A)
3.4%
(B)
3.7%
(C)
4.1%
(D)
4.6%
(E)
5.0%
77
159.
A loan is amortized with level monthly payments at an annual effective interest rate of 10%. The
amount of principal repaid in the 6th month is 500.
Calculate the principal repaid in the 30th month.
(A)
500
(B)
555
(C)
605
(D)
705
(E)
805
160.
Seth repays a 30-year loan with a payment at the end of each year. Each of the first 20 payments
is 1200, and each of the last 10 payments is 900. Interest on the loan is at an annual effective
rate of i, i > 0. The interest portion of the 11th payment is twice the interest portion of the 21st
payment.
Calculate the interest portion of the 21st payment.
(A)
250
(B)
275
(C)
300
(D)
325
(E)
There is not enough information to calculate the interest portion of the 21st
payment.
78
161. Deleted
162. Deleted
163.
John took out a 20-year loan of 85,000 on July 1, 2005 at an annual nominal interest rate of 6%
compounded monthly. The loan was to be paid by level monthly payments at the end of each
month with the first payment on July 31, 2005.
Right after the regular monthly payment on June 30, 2009, John refinanced the loan at a new
annual nominal rate of 5.40% compounded monthly, and the remaining balance will be paid with
monthly payments beginning July 31, 2009. The amount of each payment is 500 except for a
final drop payment.
Calculate the date of John’s last payment.
(A)
July 31, 2022
(B)
April 30, 2030
(C)
May 31, 2030
(D)
April 30, 2031
(E)
May 31, 2031
164.
A 25-year loan is being repaid with annual payments of 1300 at an annual effective rate of
interest of 7%. The borrower pays an additional 2600 at the time of the 5th payment and wants
to repay the remaining balance over 15 years.
Calculate the revised annual payment.
(A)
1054.58
(B)
1226.65
(C)
1300.00
(D)
1369.38
(E)
1512.12
79
165.
A 1000-par value 30-year bond has an annual coupon rate of 7% paid semiannually. After an
initial 10-year period of call protection, the bond is callable immediately following the payment
of any of the 20th through the 59th coupons.
i)
If the bond is called before payment of the 40th coupon, the redemption value is
1250.
ii)
If the bond is called immediately after the payment of any of the 40th through the
59th coupons, the redemption value is 1125.
iii)
If the bond is not called, it will be redeemed at par.
To ensure that the bond will provide at least an annual nominal yield rate of 5% convertible
semiannually, it must be assumed that the bond will be called or redeemed immediately after the
payment of the nth coupon.
Calculate n.
(A)
20
(B)
39
(C)
40
(D)
59
(E)
60
166.
Bond X is a 20-year bond with annual coupons and the following characteristics:
i)
Par value is 1000.
ii)
The annual coupon rate is 10%.
iii)
Bond X is callable at par on any of the last five coupon dates.
Calculate the maximum purchase price for Bond X that will guarantee an annual effective yield
rate of at least 5%.
(A)
1519
(B)
1542
(C)
1570
(D)
1596
(E)
1623
80
167.
A life insurance company invests two million in a 10-year zero-coupon bond and four million in
a 30-year zero-coupon bond. The annual effective yield rate for both bonds is 8%.
When the 10-year bond matures, the company reinvests the proceeds in another 10-year zerocoupon bond. At that time the bond yield rate is 12% annual effective.
After 20 years from the initial investment, the 30-year bond is sold to yield an annual effective
rate of 10% to the buyer. The maturity of the second 10-year bond and the sale of the 30-year
bond result in a gain of X on the company’s initial investment of six million.
Calculate X.
(A)
23 million
(B)
29 million
(C)
32 million
(D)
34 million
(E)
42 million
168.
You are given the following information about a 20-year bond with face amount 7500:
i)
The bond has an annual coupon rate of 7.4% paid semiannually.
ii)
The purchase price results in an annual nominal yield rate to the investor of 5.3%
convertible semiannually.
iii)
The amount for amortization of premium in the fourth coupon payment is 28.31.
Calculate the redemption value of the bond.
(A)
7660
(B)
7733
(C)
7795
(D)
7879
(E)
7953
81
169.
Claire purchases an eight-year callable bond with a 10% annual coupon rate payable
semiannually. The bond has a face value of 3000 and a redemption value of 2800.
The purchase price assumes the bond is called at the end of the fourth year for 2900, and
provides an annual effective yield of 10.0%.
Immediately after the first coupon payment is received, the bond is called for 2960. Claire’s
annual effective yield rate is i.
Calculate i.
(A)
9.8%
(B)
10.1%
(C)
10.8%
(D)
11.1%
(E)
11.8%
170.
You are given the following information about a 20-year bond with face amount 1000:
i)
The bond has an annual coupon rate of r payable semiannually and is redeemable
at par.
ii)
The nominal annual yield rate convertible semiannually is 7.2%.
iii)
The amount for accumulation of discount in the seventh coupon payment is 4.36.
Calculate r.
(A)
2.1%
(B)
4.0%
(C)
4.3%
(D)
6.0%
(E)
6.9%
82
171.
Bond A and Bond B are both annual coupon, five-year, 10,000 par value bonds bought to yield
an annual effective rate of 4%.
i)
Bond A has an annual coupon rate of r%, a redemption value that is 10% below
par, and a price of P.
ii)
Bond B has an annual coupon rate of (r+1)%, a redemption value that is 10%
above par, and a price of 1.2P.
Calculate r %.
(A)
5.85%
(B)
6.85%
(C)
7.85%
(D)
8.85%
(E)
9.85%
172.
You are given the following information about an n-year bond, where n > 10:
i)
The bond pays 8% semiannual coupons and has face amount 1000.
ii)
The bond is redeemable at par.
iii)
The bond is callable at par 5 years after issue or 10 years after issue.
iv)
P is the price to guarantee a yield of 6.8% convertible semiannually and Q is the
price to guarantee a yield of 8.8% convertible semiannually.
v)
|P – Q| = 123.36.
Calculate n.
(A)
11
(B)
15
(C)
19
(D)
22
(E)
26
83
173.
An insurer enters into a four-year contract today. The contract requires the insured to deposit
500 into a fund that earns an annual effective rate of 5.0%, and from which all claims will be
paid. The insurer expects that 100 in claims will be paid at the end of each year, for the next four
years. At the end of the fourth year, after all claims are paid, the insurer is required to return
75% of the remaining fund balance to the insured.
To issue this policy, the insurer incurs 100 in expenses today. It also collects a fee of 125 at the
end of two years.
Calculate the insurer’s yield rate.
(A)
9%
(B)
24%
(C)
39%
(D)
54%
(E)
69%
174.
On January 1, an investor placed 4000 in a fund.
The balance grew to 4320 on July 1. The investor then deposited an amount X.
After the deposit, the balance increased by 9% from July 1 to December 31.
What is the effect on the annual effective yield rate and the time-weighted rate of return of
increasing the value of X?
(A)
The yield rate increases; the time-weighted rate remains unchanged.
(B)
The yield rate increases; the time-weighted rate increases.
(C)
The yield rate decreases; the time-weighted rate increases.
(D)
The yield rate decreases; the time-weighted rate decreases.
(E)
The yield rate decreases; the time-weighted rate remains unchanged.
84
175.
On January 1, a fund is worth 100,000. On June 1, the value has increased to 120,000 and then
30,000 of new principal is deposited. On October 1, the value has declined to 130,000 and then
50,000 is withdrawn. On January 1 of the following year, the fund is again worth 100,000.
Calculate the dollar-weighted rate of return using the simple interest approximation.
(A)
0.00%
(B)
19.05%
(C)
25.00%
(D)
26.67%
(E)
30.00%
176.
An investor buys a perpetuity-immediate providing annual payments of 1, with an annual
effective interest rate of i and Macaulay duration of 17.6 years.
Calculate the Macaulay duration in years using an annual effective interest rate of 2i instead of i.
(A)
8.8
(B)
9.3
(C)
9.8
(D)
34.2
(E)
35.2
85
177.
An investor purchases two bonds. The bonds have the same annual effective yield rate i, with
i > 0.
With respect to the annual effective yield rate, their modified durations are a years and b years,
with 0 < a < b.
One of these two bonds has a Macaulay duration of c years, with a < c < b.
Determine which of the following is an expression, in years, for the Macaulay duration of the
other bond.
(A)
bc/a
(B)
ac/b
(C)
ab/c
(D)
b+c–a
(E)
a+c–b
178.
A 20-year bond priced to have an annual effective yield of 10% has a Macaulay duration of 11.
Immediately after the bond is priced, the market yield rate increases by 0.25%. The bond's
approximate percentage price change, using a first-order Macaulay approximation, is X.
Calculate X.
(A)
–2.22%
(B)
–2.47%
(C)
–2.50%
(D)
–2.62%
(E)
–2.75%
86
179.
A common stock will pay 2 per share in dividends at the end of the current year. You are given
that the earnings of the corporation increase 7% per year indefinitely, the number of shares
increases 4% per year indefinitely, and that the corporation plans to continue to pay the same
percentage of its earnings in dividends.
The price of the stock 10 years from the beginning of the current year will be X. At that time, the
annual effective interest rate is assumed to be 10%.
Calculate X using the dividend discount model.
(A)
36.32
(B)
36.91
(C)
37.35
(D)
37.97
(E)
38.55
180.
Determine which of the following statements regarding asset-liability management techniques is
true.
(A)
Redington immunization requires that the convexity of the liabilities is greater
than the convexity of the assets.
(B)
An advantage of the Redington immunization technique over the cash-flow
matching technique is that the portfolio manager has more investment choices
available.
(C)
Both Redington immunization and full immunization are based on the assumption
that the yield curve has higher yields for longer term investments.
(D)
A fully immunized portfolio ensures that the present value of assets will exceed
the present value of liabilities with non-parallel shifts in the yield curve.
(E)
A cash-flow matched portfolio requires less rebalancing than a Redington
immunized portfolio, but more rebalancing than a fully immunized portfolio.
87
181.
A company has liabilities that require it to make payments of 1000 at the end of each of the next
five years. The only investments available to the company are as follows:
Investment
Price Subsequent Cash Flows
J
1500
500 at the end of each year for 5 years
K
500
1000 at the end of year 5
L
1000
500 at the end of each year for 4 years
M
4000
1000 at the end of each year for 5 years
The company is able to purchase as many of each investment as it wants, but only in whole units.
The company’s investment objective is to be fully immunized over the next five years.
Calculate the lowest possible cost to achieve this objective.
(A)
1500
(B)
2000
(C)
2500
(D)
3000
(E)
4000
182.
A railroad company is required to pay 79,860, which is due three years from now. The company
invests 15,000 in a bond with modified duration 1.80, and 45,000 in a bond with modified
duration Dmod, to Redington immunize its position against small changes in the yield rate.
The annual effective yield rate for each of the bonds is 10%.
Calculate Dmod.
(A)
2.73
(B)
3.04
(C)
3.34
(D)
3.40
(E)
3.65
88
183.
A company must pay liabilities of 1000 at the end of year 1 and X at the end of year 2.
The only investments available are:
i)
One-year zero-coupon bonds with an annual effective yield of 5%
ii)
Two-year bonds with a par value of 1000 and 10% annual coupons, with
an annual effective yield of 6%
The company constructed a portfolio that creates an exact cash flow matching strategy for these
liabilities. The total purchase price of this portfolio is 1783.76.
Calculate the amount invested in the one-year zero-coupon bonds.
(A)
784
(B)
831
(C)
871
(D)
915
(E)
935
184.
A company must pay liabilities of 4000 and 6000 at the end of years one and two, respectively.
The only investments available to the company are one-year zero-coupon bonds with an annual
effective yield of 8% and two-year zero-coupon bonds with an annual effective yield of 11%.
Determine how much the company must invest today to exactly match its liabilities.
(A)
8,473
(B)
8,573
(C)
8,848
(D)
9,109
(E)
10,000
89
185.
The Federal Open Market Committee (FOMC) has decided to decrease the target level of the
federal funds rate.
Determine the effect on the reserving and lending activity of U.S. banks.
(A)
It becomes more expensive for banks to run a shortfall in their reserve accounts;
thus, banks will be motivated to write fewer loans, and the interest rates charged
on these loans will decrease.
(B)
It becomes more expensive for banks to run a shortfall in their reserve accounts;
thus, banks will be motivated to write fewer loans, and the interest rates charged
on these loans will increase.
(C)
It becomes more expensive for banks to run a shortfall in their reserve accounts;
thus, banks will be motivated to write more loans, and the interest rates charged
on these loans will decrease.
(D)
It becomes less expensive for banks to run a shortfall in their reserve accounts;
thus, banks will be motivated to write more loans, and the interest rates charged
on these loans will increase.
(E)
It becomes less expensive for banks to run a shortfall in their reserve accounts;
thus, banks will be motivated to write more loans, and the interest rates charged
on these loans will decrease.
186.
On a given day, the discount rate is 3.65%, the prime rate is 3.55%, the LIBOR is 3.30%, the
federal funds rate is 3.25%, and the federal funds target rate is 3.20%
On the same day, Bank XYZ's reserve balance held at the Federal Reserve is lower than the
reserve requirement, and Bank XYZ needs to borrow funds from those member institutions of
the Federal Reserve who have excess funds in their reserve. Let x be the rate at which Bank
XYZ borrows from these excess funds.
Determine x.
(A)
3.20%
(B)
3.25%
(C)
3.30%
(D)
3.55%
(E)
3.65%
90
187.
A 20-year bond priced to have an annual effective yield of 10% has a Macaulay duration of 11.
Immediately after the bond is priced, the market yield rate increases by 0.25%. The bond's
approximate percentage price change, using a first-order modified approximation, is X.
Calculate X.
(A)
–2.22%
(B)
–2.47%
(C)
–2.50%
(D)
–2.62%
(E)
–2.75%
188.
Krishna buys an n-year 1000 bond at par. The Macaulay duration is 7.959 years using an annual
effective interest rate of 7.2%.
Calculate the estimated price of the bond, using the first-order Macaulay approximation, if the
interest rate rises to 8.0%.
(A)
940.60
(B)
942.54
(C)
944.56
(D)
947.03
(E)
948.47
91
189.
A bond has a modified duration of 8 and a price of 112,955 calculated using an annual effective
interest rate of 6.4%.
EMAC is the estimated price of this bond at an interest rate of 7.0% using the first-order Macaulay
approximation.
EMOD is the estimated price of this bond at an interest rate of 7.0% using the first-order modified
approximation.
Calculate EMAC − EMOD .
A.
91
B.
102
C.
116
D.
127
E.
143
190.
SOA Life Insurance Life Insurance Company has a portfolio of two bonds:
•
•
Bond 1 is a bond with a Macaulay duration of 7.28 and a price of 35,000; and
Bond 2 is a bond with a Macaulay duration of 12.74 and a price of 65,000.
The price and Macaulay duration for both bonds were calculated using an annual effective
interest rate of 4.32%
Bailey estimates the value of this portfolio at an interest rate of i using the first-order Macaulay
approximation to be 105,000.
Determine i.
A.
3.49%
B.
3.62%
C.
3.85%
D.
3.92%
E.
4.03%
92
191.
Graham is the beneficiary of an annuity due. At an annual effective interest rate of 5%, the
present value of payments is 123,000 and the modified duration is DMOD .
Tyler uses the first-order Macaulay approximation to estimate the present value of Graham’s
annuity due at an annual effective interest rate was 5.4%. Tyler estimates the present value to be
121,212.
Calculate DMOD , the modified duration of Graham’s annuity at 5%.
A.
3.67
B.
3.75
C.
3.85
D.
3.95
E.
4.04
192.
Jenna decides to purchase a U.S. Treasury Bill for 95,000. The Treasury Bill matures in 180
days for 100,000.
Let QR be the quoted rate on this U.S. Treasury Bill.
Let j be the annual effective yield on this U.S. Treasury Bill assuming a 365 day year.
Calculate j – QR.
A.
0.25%
B.
0.40%
C.
0.65%
D.
0.96%
E.
1.23%
93
193.
James has the choice of the following two Treasury Bills:
•
•
A Government of Canada Treasury Bill for 98,000. The Canadian Treasury Bill matures
in 120 days for 100,000.
A U.S. Treasury Bill for 98,000. The U.S. Treasury Bill matures in 120 days for
100,000.
Which of the following statements is NOT true.
A.
The quoted rate for the Government of Canada Treasury Bill is 6.2075%.
B.
The quoted rate for the Government of Canada Treasury Bill exceeds the quoted
rate for the U.S. Treasury Bill.
C.
The annual effective yield rate earned by the Government of Canada Treasury Bill
is equal to the annual effective yield rate earned by the U.S. Treasury Bill.
D.
The annual effective interest rate earned by the Government of Canada Treasury
Bill is less than the quoted rate on the Government of Canada Treasury Bill
E.
The annual effective interest rate earned by the U.S. Treasury Bill is greater than
the quoted rate on the U.S. Treasury Bill.
194.
Anderson Bank offers a five-year loan. It is repaid with a single payment of principal and
interest at time five. Anderson wants to receive an annual rate of 5% compounded continuously
to reflect deferred compensation. For-this loan, the percentage of borrowers that will default is
0.7%. For the loans where there are defaults, Anderson Bank will be able to recover 30% of the
amount owed after five years.
Let δ be the credit spread calculated as an annual rate compounded continuously that Anderson
Bank needs to charge.
Calculate 1000δ .
A.
0.68
B.
0.78
C.
0.88
D.
0.98
E.
1.08
94
195.
Porter makes three-year loans that include inflation protection. The annual interest rate
compounded continuously that must be paid is 3.2% plus the rate of inflation.
The U.S. government borrows 100,000 for three years from Porter. The actual annual inflation
rate during the first year was 2.4% compounded continuously. The actual annual inflation rates
for the second and third years respectively was 2.8% and 4.2% compounded continuously.
The U.S. government is considered a risk free borrower, which means there is no chance of
default.
Calculate the amount that the U.S. government will owe Porter at the end of three years.
A.
120,560
B.
120,740
C.
120,925
D.
121,125
E.
122,250
196.
Katarina has borrowed 300,000 from Trout Bank. Katarina will repay 100,000 of principal at the
end of each of the first three years.
Katarina will pay Trout Bank a variable interest rate equal to the one year spot interest rate at the
beginning of each year.
Katarina would like to have a fixed interest rate so she enters into an interest rate swap with Lily.
Under the interest rate swap, Katarina will pay a fixed rate to Lily, and Lily will pay a variable
rate to Katarina. The variable rate will be the same rate that Katarina is paying to Trout Bank.
The other terms of the swap will mirror the loan that Katarina has.
Which of the following statements is true?
A.
This is an accreting swap.
B.
The settlement period for the swap is three years.
C.
The notional amount for this swap is 300,000.
D.
Katarina and Trout Bank are counterparties to the swap.
E.
Lily is the receiver under the swap.
95
197.
Katarina has borrowed 300,000 from Trout Bank. Katarina will repay 100,000 of principal at the
end of each of the first three years.
Katarina will pay Trout Bank a variable interest rate equal to the one year spot interest rate at the
beginning of each year.
Katarina would like to have a fixed interest rate so she enters into an interest rate swap with Lily.
Under the interest rate swap, Katarina will pay a fixed rate to Lily, and Lily will pay a variable
rate to Katarina. The variable rate will be the same rate that Katarina is paying to Trout Bank.
The other terms of the swap will mirror the loan that Katarina has.
You are given the following spot interest rates:
Time (t)
1
2
3
4
5
Spot Rate ( rt )
4.3%
4.6%
5.1%
5.4%
5.6%
Calculate the swap interest rate for Katarina’s swap.
A.
4.27%
B.
4.52%
C.
4.78%
D.
5.07%
E.
5.31%
96
198.
You are given the following spot interest rates:
Time (t)
1
2
3
4
5
Spot Rate ( rt )
4.3%
4.6%
5.1%
5.4%
5.6%
Tommy purchases a deferred interest rate swap with a term of five years. Under the swap, there
is no swapping of interest rates during the first two years. During the last three years, the
settlement period will be one year. Under this swap, Tommy will be the payer. The variable
interest rate will be based on the one year spot rate at the start of each settlement period.
The notional amount of this swap is 500,000.
Calculate the swap rate for this swap.
A.
5.54%
B.
5.77%
C.
6.04%
D.
6.27%
E.
6.54%
97
199.
Miaoqi and Nui entered into a four year interest rate swap on May 5, 2015. The notional amount
of the swap was a level 250,000 for all four years. The swap has annual settlement periods with
the first period starting on May 5, 2015.
Under the swap, Miaoqi agreed to pay a variable rate based on the one year spot rate at the
beginning of each settlement period. Nui will pay Miaoqi the fixed rate of 4% on each
settlement date.
On May 5, 2017, the spot interest rate curve was as follows:
Time (t)
1
2
3
4
5
Spot Rate ( rt )
3.8%
4.1%
4.3%
4.5%
4.7%
Miaoqi decides that she wants to sell the swap on May 5, 2017.
Calculate the market value of the swap on May 5, 2017, from Miaoqi’s position in the swap.
A.
– 443
B.
– 251
C.
251
D.
438
E.
443
98
200.
SOA Farms has a 500,000 loan from Bailey Bank. Under the terms of the loan, SOA will pay
interest annually to Bailey Bank based on LIBOR plus 120 basis points. Additionally, SOA will
pay the principal of 500,000 at the end of five years.
SOA would prefer to know the annual interest cost that will be incurred. To fix the interest rate
on the loan, SOA enters into a five-year interest rate swap with a notional amount of 500,000 and
annual settlement dates. The terms of the swap are that SOA will make swap payments based on
a fixed rate of 5.35% and will receive swap payments based on a variable rate of LIBOR plus 50
basis points.
During the third year of the loan, LIBOR is 5.6%.
Calculate the net interest payment made by SOA at the end of the third year.
A.
26,750
B.
29,250
C.
30,250
D.
31,500
E.
34,000
99
201.
The current spot interest rate curve is as follows:
t
0.25
0.50
0.75
1.00
1.25
1.50
rt
1.50%
1.65%
1.79%
1.92%
2.10%
2.25%
t
1.75
2.00
2.25
2.50
2.75
3.00
rt
2.40%
2.48%
2.80%
3.10%
3.35%
3.50%
Rafael has a one year loan for 1,000,000 with principal paid at the end of the one-year period.
The loan has a variable interest rate that resets at the beginning of each three month period. The
interest rate will be the spot interest rate at the beginning of each three month period.
Rafael enters into an interest rate swap where he is the payer with the characteristics of the swap
exactly matching the loan.
Determine the quarterly swap rate that Rafael will pay.
A.
38 bp
B.
43 bp
C.
48 bp
D.
53 bp
E.
58 bp
100
202.
You are given the following prices for a zero coupon bond that matures for 1 on the maturity
date:
Maturity Date
1 year
2 years
3 years
4 years
5 years
Price
0.965
0.920
0.875
0.825
0.770
Josh and Phillip enter into a four year swap with a notional amount of 200,000. The swap has
annual settlement periods. Under the swap, Josh will pay Phillip the fixed swap rate at the end of
each year while Phillip will pay Josh the variable rate where the variable rate is the one year spot
rate at the beginning of each year.
Determine the net swap payment at the end of the first year.
A.
Josh pays 2509
B.
Josh pays 3309
C.
Phillip pays 1709
D.
Phillip pays 2509
E.
Phillip pays 3309
203.
Determine which one of the following statements is true with respect to the characteristics of
U.S. Treasury Bonds.
A.
When the bond’s coupons are indexed to inflation, the security is labelled a
“nominal return bond” rather than a “real return bond.”
B.
“Real return bonds” are more commonly issued than “nominal return bonds.”
C.
The yields on “nominal return bonds” are considered risk-free because the
purchasing power generated is known with certainty in advance.
D.
The U.S. government is able to assume inflation risk because its tax receipts are
directly linked to inflation rates.
E.
Theoretically, Treasury yields can form an inverted yield curve shape, but this
phenomenon has not yet been observed in practice.
101
204.
Determine which one of the following statements is false.
A.
Both U.S. Treasury bonds and Government of Canada bonds are issued with
terms to maturity of up to 30 years.
B.
The yields on both U.S. Treasury bonds and Government of Canada bonds are
virtually risk-free.
C.
Bonds are issued at the state/provincial and local levels in both countries with
default rates greater than at the national level.
D.
For Government of Canada bonds denominated in Canadian dollars, yields are
primarily based on the level of economic activity in Canada; for U.S. Treasury
bonds denominated in U.S. dollars, yields are primarily based on the level of
economic activity in the U.S.
E.
For Government of Canada bonds denominated in U.S. dollars, yields should be
identical to otherwise equivalent U.S. Treasury bonds because the liquidity risk of
the Government of Canada bonds will be the same as the liquidity risk of the U.S.
Treasury bonds.
102